While, hopefully, your disability policy will provide sufficient income to meet your essential expenses if you have to file a claim, benefit amounts rarely provide monthly income that is comparable to what you earned while practicing. Additionally, many policies have maximum benefit periods that expire at age 65 or 67, which means you will be without a monthly income for the remainder of your life if you haven’t established other financial resources. As we’ve discussed in previous posts, one option to ensure continued financial stability is to purchase a policy that includes lifetime benefits rider. Another option we are beginning to see offered with some policies is the lump sum disability rider benefit.
This rider is designed to provide a one-time lump sum payment at the end of the benefit period, much like being able to access a 401(k) or other retirement account upon reaching retirement age. This lump sum can also help to offset expenses that may be more likely to arise later in life, like the costs of needed surgeries or other medical care.
While lifetime benefits work by paying a claimant a continuing monthly benefit after the normal expiration date of a policy, under this type of rider, the insurance company pays a one-time payment at the end of the policy’s benefit period. The payout will typically be a certain percentage of the benefit payments the policyholder received prior to the end of the maximum benefit period under the policy. This calculation includes payments received both while on total disability and residual disability, over the life of the policy, whether continuous or not.
For example, say a claimant received a monthly benefit payment of $5,000 per month (or $60,000 per year) and remains on claim from age 48 to the end of the benefit period (age 65, for example) or 17 years. If the lump sum benefit is equal to 35%, the claimant would receive a one-time payment of $357,000 (17 x $60,000 x .35).
It is also important to note that these riders typically require that a claimant receive a minimum threshold amount of benefits in qualify to receive the lump sum payment. For example, the qualifying amount may be set at $60,000. If the monthly benefit payment is $5,000 a month, the policyholder won’t be eligible for a lump sum payment unless he or she remains on claim for at least 12 months over the life of the policy.
Thus, with a lump sump benefit rider, the longer a policyholder stays on claim, the larger the lump sum payment will be. It therefore stands to reason that insurance companies have an even stronger than normal incentive to get a claimant off claim. As insurance companies often use aggressive tactics to investigate claims in order to find justification to terminate or deny claims in an attempt to save money, having a lump sum benefit rider could result in greater scrutiny of a policyholder’s claim, particularly before the qualifying amount is reached. However, unlike lifetime benefit rider options (which typically require a policyholder to continue to submit proof of loss for life in order to continue receiving lifetime benefits), the insurance company’s ability to scrutinize a claim ends upon the payment of the lump sum under a lump sum benefit rider.
Thus, as with all policy provisions, there are pros and cons to keep in mind, and deciding whether the lump sum disability benefit rider is the right policy for you requires careful consideration of what you can afford in premiums, your age, other sources of income you and your household have, and your plans for retirement.